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Value-added farm enterprises should be analyzed to ensure success

March 21, 2013 | 0 comments



For many farmers, especially women who farm, there is a lot of interest in value-added enterprises.

Some of the perks and pitfalls of these kinds of enterprises were outlined during last week's Wisconsin Ag Women's Summit in Madison. Paul Dietmann, an emerging markets specialist with Badgerland Financial, said traditional agricultural markets are commodity-based and favor larger producers.

"As profit-per-unit shrinks on these kinds of farms, production must increase. Yet it is a market for all of the product that is produced. But the price isn't known."

Market volatility is a challenge in these kinds of markets and that has some farmers considering non-traditional or value-added enterprises as a way to add profitability to the farm. For beginning farmers it can be a way to get started.

Dietmann, who most recently worked as the head of the Farm Center at the Department of Agriculture, Trade and Consumer Protection, also served in 2010 as the Deputy Secretary there. Previously he worked for 11 years as the Sauk County agriculture agent.

Now, he says, he feels like he has "fallen into his dream job" working with farmers who have non-traditional operations like grazing and organic farming or are just beginning their farming operation or trying some new kind of value-added enterprise.

Throughout his career, Dietmann said he has worked with farmers who have done things very well and has seen other cases where whole farming operations fell victim to bad management decisions. He offered his audience ideas on how to stay out of that latter group.

Non-traditional farming operations, like community-supported agriculture (CSA) farms or other kinds of direct-marketing enterprises, tend to be more value-based and local and feature a personal touch, he said.

"People want to know the farmer, they want to know how the food is being produced," he said.

The strength of these kinds of enterprises is that they try to take the volatility out of the market. If profits shrink, the operation may need to switch markets or products or strategies, he said.

These enterprises can be profitable if all goes well. "The goal is to maximize profit per unit."

PITFALLS

One of the pitfalls is that the price may be right, but sales may fall short. He used a fresh market vegetable grower as an example.

"At a farmer's market on a Saturday it might rain all day and all of those vegetables don't sell," he said. "That cuts down on profits even though the price per unit is favorable."

In these kinds of farming operations the size may grow, but survival is not dependent on growth, Dietmann noted.

One of the reasons many farmers decide to get into value-added enterprises is to get a bigger share of the consumer's dollar. Of each dollar spent in the United States on food, over 84 cents goes for packaging, processing and retail, said Dietmann. About 15 cents of the dollar is the farmer's share.

"People spend 11 percent of their disposable income for food in the United States. It's about four times that in the developing world."

For value-added farmers, direct marketing efforts are seen as an opportunity to take some of that 84 cents that doesn't go to farmers now and bring it back into the agricultural community.

"Now that sounds good but there are some pitfalls," he said.

Farmers in these enterprises tend to self-fund their operations and they have too little cash or they request loan amounts that are too small for lenders to efficiently provide.

In answer to that problem the Farm Service Agency recently began a micro-loan program that has proven to be very popular, Dietmann said.

Without a loan and a banking advisor, many of these farmers have no requirement to analyze their cash flow and don't get help or advice on their business plan. Without having any kind of cash flow analysis, it also makes it difficult to insure against production risks, he added.

On many of these farms, the operators may not realize they aren't making money because they aren't watching cash flows and projections. These kinds of businesses can be slow to ramp up into profitability.

"The start-up phase may require significant investment but cash flow may be a year or more out."



LABOR NEEDS

Many value-added operations are heavily dependent on one or two irreplaceable people, Dietmann said, and that highlights the challenge of matching the scale of production with markets and labor.

Another pitfall is that generally not enough value is put on the operator's labor and management.

While Dietmann was at DATCP, he was part of a study of profitability in the dairy goat industry. For two years they studied the finances of 12 state goat dairy farms, which had all been in business at least five years. They found the average farm was losing money on a monthly basis.

"These were very efficient producers too but the markets just weren't there."

One of the things that happens in some value-added farming enterprises is that some people enter the "business" for reasons other than earning a profit.

Some beginning farmers, he said, are over the age of 55 and are looking at farming as a retirement occupation. If profits are not a key goal of any given business that can make it difficult for those who are trying to make a profit.

There are potential legal or liability issues on some kinds of enterprises. Things like inviting people onto the farm for tours, haunted hay mows and other visits can bring insurance issues.

People considering a value-added enterprise on their farms should write a business plan and a marketing plan. Among other things they should define the risks and have contingency plans.

It is also important to look for multiple sources of capital. "Investments in capital should be watched closely. If practical it's better to lease rather than buy equipment."

Part of the business plan should utilize enterprise budgets to analyze the value-added portion of the business. Dietmann showed a business analysis for a small farm that was planning to grow fresh market vegetables.

Once the analysis was done it showed that there were going to be times of the year when cash would not be coming in. "You really need to go through this kind of plan so you'll know how to budget family living and business investments."



AGRITOURISM

Some farms add to their cash flow by opening their farm for tours, corn mazes, pumpkin patches and other kinds of events.

Dietmann shared a 2012 survey done of people attending a variety of agritourism events. The top reason given for being part of it was a desire to support local farmers. People also said they wanted to spend time with family and friends; the third reason was a desire for fresh-produced food.

"We've seen ebbs and flows in particular businesses but there has been pretty steady growth in support of local farms," he said.

Some farmers who want to produce specialty products have banded together. There is a state hop exchange cooperative and farmers sign on to grow specific kinds of hops for brewers. This enterprise has seen a jump in growth courtesy of the strong increase in craft brewing in the state.

Another specialty is producing grass-fed beef that is marketed through a growers' group.

Dietmann sees a lot of promise in things like commercial grade kitchens at various locations around the state that can be rented to produce food for sale, like jam, jellies and preserves.

One of them, in Mineral Point, allows farmers to bring in their produce and for a minimal investment they can make their products and test the market.

Others allow organic farmers to process their goods.

Dietmann advised the women attending his session at the conference to establish a web presence for their enterprise early on. Most people who would be interested in the value-added products from a farm would be looking for more information on the web.

"Even if you're not making sales on the internet, you should be there."

Websites and other kinds of networking that link complementary businesses together are a big help in getting an enterprise going. He encouraged anyone doing this kind of value-added enterprise to get linked up with the "Something Special from Wisconsin" program, which helps promote a variety of products made in Wisconsin.

But the most important thing, said Dietmann, is to build a business plan and make sure the enterprise is on firm financial footing so it can go on and be successful.

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